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    Question

    If the RoI of a firm is 12% and the interest on

    borrowings paid by the firm is 10%, the financial leverage of the firm will be:
    A Unfavorable for the firm Correct Answer Incorrect Answer
    B Favorable for the firm Correct Answer Incorrect Answer
    C Indifferent for the firm Correct Answer Incorrect Answer
    D Cannot be determined Correct Answer Incorrect Answer
    E Depends on fixed costs of the firm Correct Answer Incorrect Answer

    Solution

    If ROI (Return on Investment) of the firm is greater than cost of borrowing then it is favourable to the firm. Had it been opposite, firm should not have borrowed the money and made investments.

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